Privatization, Ignorance A Dangerous Combination

Privatization of Social Security could be very risky business, considering that personal accounts would put money in the hands of many Americans who are woefully ignorant of the basics of the economic system and common investment vehicles, such as mutual funds, The New York Times reported last week.

About half of respondents to a Harris Interactive poll did not realize that, by keeping money at home in cash, they risked losing ground to inflation.

"Given recent signs that inflation might be increasing, this is quite a frightening finding," said Alan B. Krueger, a professor of economics and public policy at Princeton University and chief economist for the organization that commissioned the study, the National Council on Economic Education.

The survey polled 3,512 adults and 2,242 high school students, with the young people demonstrating a poorer understanding of economics than the older cohorts. Only 15% of students understood that mutual funds are designed for diversification, with some answering that they provide higher returns than individual stocks and others answering that they guarantee a steadier income.

Krueger said that sort of ignorance contributes to investors' susceptibility in scams. Perhaps even more troubling, it speaks to Americans' inability to handle their own investing, should the government allow workers to divert a portion of their payroll tax from Social Security and into a personal account.